Forex Basic Terminologies for Beginners
BASIC CURRENCY AND QUOTE CURRENCY
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency.
Currency pairs compare the value of one currency to another — the base currency (or the first one) versus the second, or the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency.
An exchange rate is the price of a nation’s currency in terms of another currency. Thus, an exchange rate has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly.
In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency.
In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency.
SHORT POSITION AND LONG POSITION
When a currency pair is long, the first currency is bought while the second currency is sold short. To go long on a currency means that you buy it, hoping that the price will rise. A long position is expressed in terms of the base currency. A short position occurs when the first currency is sold while the second currency is bought. To go short on a currency means that you sell it, hoping for a decline in the market price. A short position is usually expressed in terms of the base currency. Remember that every FX trading position requires a trader to go long in one position while simultaneously going short in another.
BID PRICE AND ASK PRICE
The term bid and ask (also known as bid and offer) refers to a two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time. The bid price represents the maximum price that a buyer is willing to pay for a security. The ask price represents the minimum price that a seller is willing to receive. A trade or transaction occurs after the buyer and seller agree on a price for the security.
The difference between bid and ask prices, or the spread, is a key indicator of the liquidity of the asset. In general, the smaller the spread, the better the liquidity.
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